Rate cut positive for property sentiment

Australia’s record low interest rate is likely to bring stability and confidence back to the residential sector.

June 06, 2018

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Australia’s record low interest rate is likely to bring stability and confidence back to the country’s residential sector, while also propping up tenant demand for commercial property, experts say.

The Reserve Bank of Australia made the decision earlier this week to cut the official cash rate to 1.25 percent, a move that was widely expected. The decision received a mixed reaction from the business community, but the real estate sector has been more welcoming.

The interest rate cut will be the third reprieve for the residential sector in as many weeks, says Leigh Warner, head of residential research, JLL Australia.

“The Coalition government’s miracle victory in the recent Federal Election, proposed changes by APRA to loan assessment benchmarks and now rate-cuts are all positive for the residential sector.

“We could see a recovery in residential prices in the early part of 2020, which is a necessary precursor for an improvement in residential development activity.”

Residential development activity has slowed drastically in the past 18 months, with the number of apartments being marketed across Australia’s six major capital cities falling 48 percent over the year to the end of March 2019, according to data from JLL.

The cash rate cut may also encourage investors back to the sector by creating a more compelling financial environment for non-bank lenders to finance development projects.

"Look at the return you're getting versus the cash rate," Brae Sokolski, chief investment officer of non-bank lender MaxCap, told the Australian Financial Review. "It will enhance the spread. It only in my mind makes investing in commercial real estate debt more compelling for private investors."

While the RBA rate-cut is recognition that the labour market has slowed and wage growth and inflation pressure is weak, it could have a positive knock-on effect for commercial real estate, says Andrew Ballantyne, head of research, JLL Australia.

“For property markets, the move should help arrest any potential slowing in solid office and industrial market demand as labour market momentum slows.

“While extra money in the pockets of consumers will also be good for the retail sector, many will just use it to pay down debt rather than spend on consumption and promised tax rebates and other fiscal policy support may be required to more significantly lift retail spending.”

Interest rate cuts are also supporting current commercial real estate pricing, adds Ballantyne. The expectation of the RBA’s cash rate cut has already seen the Australian 10-year bond rate fall significant from 2.32 percent in late 2018 to just 1.51 percent in June 2019.

“With commercial property yields in theory priced as a ‘premium’ above 10-year bond rates, the recent fall has widened this risk premium and increased the attractiveness of current Australian commercial property asset pricing.

“While we believe investors will remain cognisant of risk factors, the fall in the bond rates supports property yields at low levels in the office and industrial sector,” says Ballantyne.

The RBA’s most recent statement on monetary policy has the domestic economy slowing to 2.6 percent in 2019 and 2.7 percent in 2020.

RBA governor Phillip Low has said that the official cash rate could be cut to 1 percent by the year’s end.